Buying an investment property is a step toward greater financial security. As you look toward saving for retirement, an investment property can be a good long-term investment in the form of passive income today and possibly a retirement or vacation home too. Before you jump into the property buying frenzy, consider these tips to help put you on the right path.
Qualifying for a Vacation Property
Before you start the home buying process, you should be aware of the following:
- Lenders tend to have stricter lending requirements when it comes to vacation homes. These requirements range from the amount of time the borrower intends to spend at the property during the year, the property must be a single dwelling unit, not managed by a vacation property, and the required down payment of 10-20%.
- In December 2020, Fannie Mae and Freddie Mac raised the limits on borrowing for conforming loans. This allows borrowers to consider more options regarding the location and size of the home when it comes to investing in a vacation home.
- There are also stricter debt-to-income ratios when it comes to a second home. Keep in mind that the bank wants to be sure that you will be able to pay for two mortgages.
Purpose and Location of the Second Home Investment
Like many people, buying a second property can manifest dreams of grandeur. For example, "this will be a great place to take the family on vacation" or "I can't wait to spend the winter or summer months here". Determining the right investment now helps you decide what kind of property, its location, and additional overhead costs. For example, if you plan on renting the property, be prepared to be a full-time landlord. If your intention is to provide short-term rentals, determine what your monthly costs are. How will you manage those costs when the home is not drawing a rental income?
When considering where to purchase your investment property, how you are planning to use that property can also be a considerable consideration. If the long-term plan is to retire to the home of your dreams, remember that renters may be there for years before you step inside. This could mean significant renovations and repairs before then. If you love to vacation somewhere and want to invest, do your homework first. Homes in vacation spots tend to be more expensive and harder to sell when you decide to divest. Since these locations are generally considered luxury spots, you may have to wait for the right buyer and that could take a significant amount of time before selling.
Create a Budget
Buying a vacation property isn't just about mortgage payments, it is about the care and upkeep of the house. If the home was a rental property before you purchased it, ask the previous owners for financial spreadsheets. This can help you determine monthly bills, cycles for renting and what types of repairs have already been done to the property. If these types of financial statements are not available, ask the realtor if they can recommend other property investors.
Aside from the general mortgage and upkeep, ask about any other outside expenses that may be associated with the property. For example, consider HOA fees, a surcharge for amenities, or proposed legislation that may affect your taxes. Also, consider the possibility of your property sitting vacant for weeks or months. Will you be able to cover the care and maintenance of the home for an extended period of time? These types of anomalies affect the overall decision of what kind of property to purchase.
Learn More About Investing in a Second Home
Buying your first investment property requires a significant amount of legwork and time. Enlisting the help of a good real estate agent who can give you the facts about the location, rental market, and viability of the particular property you are interested in purchasing is a good place to start your search.